Forms of Business Organizations – Advantages and Disadvantages

FORMS OF BUSINESS ORGANIZATIONS

Business organizations take on different shapes and forms. Each have their own advantages and disadvantages. There are just 4 primary forms of business organizations, and they are:

Sole Proprietorship

Partnership

Corporation

Cooperative

SOLE PROPRIETORSHIP

A sole proprietorship is a business organization that is owned by one person alone. Sole proprietorships usually range from micro to small sized businesses and they take up a majority of the businesses that you see around you. The ice cream vendor you see on the street, the fish vendor you see on the market, or the mini-grocery from your neighborhood have high probabilities of being sole proprietorships. It is the simplest form of business organization which is why it is preferred by a lot of small scale business owners.

What are the Advantages of Sole Proprietorship?

It is easy to establish. A sole proprietorship needs to submit only a few requirements to the government in order for it to be considered as a legal business. Also, the government charges lesser permits and license fees for this firm of business organization.

A sole proprietorship is easier to maintain and manage because it's just a small business.

Easier to liquidate. In case the owner would want to stop business operations, doing so would be very easy. Since there is only one owner, distribution of assets won't be a problem.

All profits go to one person. There won't be any problems regarding income distribution since there is only one owner. And the owner gets to keep 100% of the profits.

What are the Disadvantages of Sole Proprietorship?

Lesser sources of funds. Since there is only one owner in a sole proprietorship, the business would have a hard time getting funds.

Less income. A proprietorship is usually only a small business. This form of business organization has been generating the least income as compared to other forms.

Limited life. The life of the sole proprietorship is limited to the life of the owner. The business dies when the owner dies.

Unlimited liability. The liability of the sole proprietorship is also the liability of the owner. If the business no longer has assets to pay its liabilities, the creditors could go after the personal assets of the sole proprietor.

PARTNERSHIP

A partnership is an organization that is formed by two or more persons who bind themselves to contribute money, property or industry (services) to a common fund with the intention of dividing the profits that would be generated among themselves. It is larger than a sole proprietorship since it is owned by multiple individuals. It is not a separate legal entity like a corporation. It is formed just by the meeting of the minds of the partners.

Most partnerships are in the small to medium enterprises and is usually formed by close friends or close family members.

What are the Advantages of a Partnership?

More sources of funds. As compared to a sole proprietorship, a partnership has more sources of funds since there are more owners.

More creativity and innovation. As the saying goes, two heads are better than one. Since there are two or more owners, more people are able to give ideas for brainstorming.

Work load is distributed. Unlike in a sole proprietorship where only one person is in charge of decision making, partnership allows the decision making to be distributed among the partners.

What are the Disadvantages of a Partnership?

Disagreements. Since two or more people own the partnership and could take part in decision making, there could be disagreements.

Unlimited liability. Similar to a sole proprietorship, if a partnership is unable to pay its liabilities, the partners would be the ones liable up to their personal properties. This means that the creditors could claim the assets of the partners in payment of the liability of the partnership.

Limited life. The life of a partnership could easily end if at least one of the partners withdraws his or her investment from the business.

CORPORATION

A corporation is considered as a separate legal entity that is distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. A corporation can also be called a "legal person or a juridical being."

What are the Advantages of a Corporation?

Unlimited Life. A corporation's life is not limited to the life of the shareholders. Even if stockholders die, the corporation will continue to live since it is a separate legal person.

Limited Liability. If a corporation cannot pay off its liabilities, creditors cannot go after the personal assets of the shareholders. The liability of a shareholder is only up to the extent of his or her capital contribution.

Ease of succession. Ownership in a corporation is evidenced by shares of stock. A stockholder can easily transfer ownership from one person to another by selling or giving the stocks.

Easier to generate funds. A corporation has a lot of options at its disposal if it needs funds. It can sell shares of stocks, issue bonds, etc.

What are the Disadvantages of a Corporation?

Hard to Form. Corporations are subject to a lot of government rules and regulations thus making it harder to register and establish as compared to other forms of business organizations.

May be subject to double taxation. The government collects a lot of taxes from corporations and is prone to indirect double taxation.

Harder to maintain. Although a corporation has access to more funds as opposed to a sole proprietorship and a partnership, it is also a lot more costly to maintain because of its larger size.

Shareholders don't always receive dividends - there are corporations that give out dividends on a yearly basis and there are corporations who do not. Distribution of dividends is at the discretion of the board of directors.

COOPERATIVE

A cooperative is a firm that is owned owned, controlled, and operated by a group of members for their own benefit. All members contribute equity capital, and shares in the control of the firm on a one-member, one-vote principle (unlike in a corporation wherein the shareholders' votes are in proportion to their equity contribution).

What are the Advantages of a Cooperative?

Easier to form. A cooperative is a lot easier to form than a corporation since it is not subject to a lot of government regulations.

Limited Liability. Similar to a corporation, if a cooperative cannot pay off its liabilities, creditors cannot go after the personal assets of the members.

Unlimited Life. A cooperative will continue to exist regardless if a member has died or has withdrawn their capital investment.

Tax advantages. A cooperative is favored by the law. Some cooperatives have already sought for tax exemptions thus greatly reducing their costs.

What are the Disadvantages of a Cooperative?

Lack of Mutual Interest. A cooperative is formed because of the common interests of the members. However, there are still members in a cooperative that lack the spirit of cooperation which results to disagreements and rivalries among members.

Lack of profit. The profits of a cooperative are generally not up to par to that of a corporation.

Corruption. Corruption, in a way, could result from the lack of profit of cooperatives which leads to misappropriation of funds by the officials.

Lack of business knowledge. Not all members of a cooperative are knowledgeable when it comes to business. Operations of a cooperative usually go down the drain when members without business know-how get elected as members of the board of directors.